Guarantees / Contract Bonds payable on demand
Types of Bank Guarantee
Exporters seeking to win overseas contracts that are put out to tender may have to provide Bid Guarantees and/or Performance Guarantees as part of the tendering process. In other circumstances Exporters may have to provide Advance Payment Guarantees to secure an Importer who has prepaid part of a sales contract.
Usually these Guarantees are payable on demand and will relate to the circumstances for which the Guarantee was originally issued.
Bid Guarantees will be used to reimburse the Importer in cases where the Exporter’s bid is accepted but the Exporter then fails to sign the contract.
Performance Guarantees will reimburse the Importer if the Exporter fails to fulfill their obligations under the contract.
An Advance Payment Guarantee will reimburse the Importer for any advance made to the Exporter when the Exporter has failed to fulfill the contract.
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Key Features
Simple Guarantees are payable on first demand
Conditional Guarantees are payable on first demand, supported by such documents as may be specified in the terms of the Guarantee
The nature of the Bank’s obligation does not involve the examination of whether the respective contractual obligations of the Seller or the Buyer have been performed
The Bank must pay according to the terms of the issued Guarantee, which is a legal undertaking separate from the contract between the Buyer and Seller.
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Benefits
Bank Guarantees facilitate Exporters in securing overseas contracts that are put out to tender
The Exporter’s bank can arrange the issuance of a local bank Guarantee. Importers, in certain countries, may only be permitted to accept local bank Guarantees
The Exporter’s bank will provide advice on structuring Guarantees to protect the Exporter’s interests.
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Restrictions/Disadvantages
The Applicant of the Guarantee must have a line of credit with a bank before that bank can issue a Guarantee
The decision to pay is with the issuing bank and not with the customer
Claims cannot be contested.
Most Widely Used Guarantees
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Bid/Tender Guarantees
These are usually issued for between 2% and 5% of the contract value as an indication to the Buyer that the tender is a serious offer and that the party submitting it (the Seller) will sign the contract if their tender is accepted. It is important to note that the issue of this type of Guarantee is also an indication that if subsequent guarantees are required under the contract, covering Performance and/or Advance Payment, they will be forthcoming.
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Performance Guarantees
These are usually issued for between 5% and 10% of the contract value, and generally become effective on expiry or release of the Tender Guarantee. Performance Guarantees, as their name suggests, are an assurance that the Seller performs in accordance with his contractual obligations.
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Advance Payment Guarantees
These are usually issued for between 10% and 20% of the contract value when an Advance Payment has been offered by the Buyer to the Seller to meet their mobilisation or other initial costs. This type of Guarantee is normally required as security for money released and therefore should be issued in a form which renders it inoperative until receipt by the Seller of the agreed Advance Payment.
For further information please contact your Relationship Manager or our Trade Finance team
